Financing Start-Ups

It's Not About the Money

Samwer brother Agentur Focus
The Samwer brothers founded Rocket Internet.
  • Why it matters

    Why it matters

    Although it is becoming easier for German start-ups to obtain funding, they could also benefit from advice and support from bigger companies.

  • Facts

    Facts

    • Start-ups in Berlin attracted a total of €1.4 billion in venture capital in the first half of 2015, more than in any other European city.
    • Despite this, many managers of start-ups complain about the length of time taken by German companies to award contracts and approve products.
    • It has been suggested that part of the problem could be that German companies want to play it safe and are less willing than their U.S. counterparts to embrace ideas that may appear wacky.
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    Audio

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Money is now expected to sort out the digital dilemma. First of all, the chancellor gives the boot to her finance minister’s plans for higher taxes on investments in start-ups. Then the economy ministry announces that a €1 billion ($1.1 billion) fund is to be set up by state-owned development bank KfW. “Look how kind we are to company founders,” is the government’s message – although it is more likely to be fears about the German economy’s capacity for innovation that are driving it.

But money alone won’t help this country advance a single step into the digital future. True friends of start-ups give more than cash. What Germany lacks is a fondness for oddballs.

It’s not like there isn’t any money there. There’s not as much as in the United States, but there’s a lot more than there was 10 years ago. Start-ups in Berlin attracted a total of €1.4 billion in venture capital in the first half of 2015, more than in any other European city. Only last week, HelloFresh, a company that delivers boxes of food for customers to cook at home, announced that it had received €75 million from a London-based investor.

Rocket Internet, the Samwer brothers’ start-up empire, owns over half of HelloFresh. The Samwers not only invest money but also put a great deal of time and knowledge into their companies. They pass on their experience from the hundreds of companies they have helped create, saving founders and their own portfolio from expensive mistakes. The Samwers are like a microcosm of Silicon Valley, where the start-up scene is more advanced and the number of people who have grown rich off the back of the scene is much higher, with the old hands supporting newcomers by providing capital and contacts.

In Germany, the network is still in its infancy. It could easily be extended if more players from established industries got involved, particularly from those sectors that are heavily dependent on innovation. They could benefit from start-ups and offer them much in return.

How is a 27-year-old IT nerd supposed to know what he needs to be aware of if he wants to conquer the U.S. market? How does he know how to dress and what to say if he’s meeting the head of sales at a medium-sized company? How is he even meant to get an appointment if he doesn’t have a big name or any acquaintances in common? How can he be expected to understand that the head of department, despite having “head” in his or her job title, isn’t allowed to decide anything without asking another two levels of management for their opinion?

This is exactly where Germany’s “founder-friendly” attitude reaches its limits. CEOs might be unanimously declaring that they are taking digitalization seriously, with more and more of them providing funding, buying start-ups or founding three of them at once. However, they then simply end up pottering about – usually in the German capital.

When it comes to actually working together, the two cultures suddenly come into conflict. Many managers of start-ups complain that it takes at least a year for a German company to award a contract. It can then take another two years for the desired product to go through all the necessary phases of approval until it is ready for the market. The fear of making a mistake is so great that companies would rather stick with tried-and-tested products, even if the new solution could prove to be cheaper, faster and more reliable.

That is understandable. The more innovative the products are, the more introverted their inventors often are.

This is another difference between Germany and the United States: it’s easier to get opportunities over there if you are a bit eccentric. In Germany, you are more likely to succeed if you have learned to fit in.

What Germany needs is a forum where nerds and corporations can meet and get to know each other better. The government hasn’t achieved much here.

Instead, the government could overcome its own prejudices. When the public sector puts contracts out to tender, for example, for software solutions, the invitation to tender does not contain the command: “Build us something completely new! Surprise us!” The sector orders more of what is already there. Companies that have been on the market for less than three years and whose sales have not yet reached €1 million will be excluded from the outset.

There is, of course, a good reason for this: The risk of small companies going out of business before the project is completed is high. However, the chances of them coming up with something innovative, receiving many more orders thanks to this contract and then one day obtaining a large amount of funding are also higher.

To contact the author: gastautor@handelsblatt.com

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